Value-Added Analysis Economic Value-Added Analysis measures the amount of value a company has created for its shareholders
It determines how much profit a company has produced after it has covered the cost of its capital
Economic Value-Added Analysis also deducts the cost of equitywhat shareholders would have earned in price appreciation and dividends by investing in a portfolio of companies with similar risk profiles
Methodology Economic Value-Added Analysis consists of three primary analyses. A manager should:
Determine the net after-tax operating profit generated by a business
Estimate the return required by investors. This calculation requires two inputs. First, identify the dollars invested in the firm. Then determine the cost of equity, or the return shareholders could have expected in dividends and appreciation from investing in stocks about as risky as the companys.
Determine the Economic Value-Added by subtracting the expected return to shareholders from the profits created by the firm
VALUE ADDED VALUE ADDED the surplus of value (wealth) created by the company by efficiently using its resources, in excess of the value of the production factors consumption.
The value-added can be determined by two methods: The Synthetic Method The Repartition Method (Addition) 1. The Synthetic Method The Synthetic Method - out of the total volume of production and commercialization activities we subtract the intermediary consumption from third parties.
VA =(Q + Mc) C
Q production Mc commercial margin C intermediary consumption from third parties Mc = Value of sold merchandises Cost of sold merchandises 2. The Repartition Method (Addition) The repartition method (addition) the value-added is determined by adding the following elements:
wages and contributions to insurance and social security fund depreciation provisions concerning the operating activity interest taxes (excluding the income tax) the recalculated result (the result associated with the turnover from which the interest is subtracted). Factorial Analysis of the Value Added The value-added can be analyzed based on the following models:
Qe VA ' Mf Qe Mf ' Mf E Mf E VA ) c va Pa E Qe VA E Qe E VA ) b va Qe Qe M 1 Qe VA ) a = = = = | . |
\ | = Factorial Analysis of the Value Added The consequences of the Value Added changes over the Economic and Financial results